CM RATING

38/100

Stove Kraft is engaged in the manufacture, trade and retail of a wide and diverse suite of kitchen solutions under Pigeon and Gilma brands. The company is one of leading player in kitchen appliances in India and are one of the dominant players for pressure cookers and amongst the market leaders in the sale of free-standing hobs and cooktops. The company was founded by Rajendra Gandhi, a first-generation entrepreneur with over 21 years of experience in the kitchen appliances industry.

Kitchen solutions business of the company comprise of cookware and cooking appliances across its brands, and its home solutions comprise various household utilities, including consumer lighting, which not only enables it to be a one stop shop for kitchen and home solutions, but also offer products at different pricing points to meet diverse customer requirements and aspirations.

The company's 'Pigeon' is a leading brand in the market for certain products such as free- standing hobs, cooktops, non-stick cookware, LPG gas stoves and induction cooktops. Its Gilma brand portfolio comprises products such as chimneys, hobs and cooktops across price ranges and designs. The company also propose to commence manufacturing of kitchen solutions under the BLACK + DECKER brand, covering the entire range of value, semi-premium and premium kitchen solutions, respectively.

Pigeon branded products contributes major part of the revenue of the company. In FY20 and 6mFY2021 the Pigeon branded product accounted about 80.86% and 76.90% of overall sales of the company. The other brands of the company 'Gilma' and BLACK + DECKER accounted for about 2.36% and 2.37%, respectively, in FY20 and 5.43% and 1.50% in 6mFY2021, respectively.

Pigeon and Gilma are the flagship brands of the company and they have enjoyed a market presence of over 15 years and enjoy a high brand recall amongst customers for quality and value for money. As a result of its co-branding initiatives over eight years with LPG companies such as Indian Oil Corporation and Hindustan Petroleum Corporation to utilize their sale and distribution channels, the company's Pigeon brand has enjoyed a wide customer outreach and continues to have a high brand recall value. The company maintain a continuous focus on the development of its brandsand invest significant resources towards their growth and outreach. Pigeon has been listed as one of the India's Most Admired Brands 2016 by White Page International.

The company through products under Pigeon brand addresses the affordable (value) segment, the company targets the semi premium segment of the market with Gilma branded products such as Chimney, hobs and cooktops. The company has also entered the premium segment in 2016 pursuant to its exclusive BLACK + DECKER Brand Licensing Agreement with Stanley Black & Decker, Inc. and The Black and Decker Corporation, which enables it to exclusively retail, and provide post-sales services in relation to, a wide range of products such as blenders and juicers, breakfast appliances, small cooking appliances and small domestic appliances in India under the BLACK +DECKER brand, up to December 31, 2027. The company is yet to commence manufacturing under the BLACK + DECKER brand.

The company, in 2016, further diversified the Pigeon brand by launching LED products under it and in 2019, it commenced manufacturing LED products at its Bengaluru facility.

The company has two well-equipped and backward integrated manufacturing facilities at Bengaluru in the southern state of Karnataka and Baddi, in the northern state of Himachal Pradesh. As of September 30, 2020, the Bengaluru facility had an installed annual production capacity of 38.40 million units, with the capability to manufacture products in the pressure cookers, non-stick cookware (roller coated and spray coated), LPG stoves, mixer grinders, LED bulbs, iron and induction cooktops categories. Similarly, as of September 30, 2020, its Baddifacility, has an installed capacity of 2.80 million units per annum, with the capability to manufacture products such as LPG stoves and inner lid cooker. The Baddi unit is focused on the Oil Company Business (OCB), which includes manufacturing and co-branding of products with such Companies. Its Bengaluru Facility is spread over approximately 46 acres and five guntas, out of which 30 acres and one gunta is available for future expansion. The Bengaluru facility accounted to about 72.3% and 79.8% of the production volumes in FY2020 and 6mFY2021.

The company as of September 30, 2020, manufactured about 79.75% of its Pigeon and Gilma branded products (in terms of number of units) in-house at its manufacturing facilities at Bengaluru (Karnataka) and Baddi (Himachal Pradesh). For certain product categories and sub-categories such as chimneys, hobs, irons, air coolers, kettles, water bottles, flasks, chairs, rice cookers, IR thermometers, pulse oximeters etc., which do not enjoy economies of scale in India, the company engage in sourcing from third party OEMs predominantly from outside India. The share of products retailed under the brand of the company but sourced from third party manufacturers accounted about 27.60% and 19.2%, respectively, for FY20 and 6mFY2021. Higher level of in-house manufacturing enables it to control and monitor the quality and costs.

The company has a separate distribution network for each of its Pigeon, Gilma and BLACK + DECKER brands. Further, there is a separate distribution network for the Pigeon LED products.

The company as of September 30, 2020, had nine strategically located C&F agents connected well to both of its manufacturing facilities in Bengaluru and Baddi. Additionally, the company has 651 distributors in 27 states and five union territories of India and 12 distributors for exports. The C&F agents and distributors are, in turn, connected with a dealer network comprising of over 45,475 retail outlets, which are driven through a sales force of 566 personnel as end of September 2020.

Gilma brand products are sold through exclusively branded outlets owned and operated by franchisees. As of September 30, 2020, there were 65 such stores spread across four states and 28 cities and towns, with a presence in the urban market in south India. Gilma stores are designed to be 'experience' stores.

Thecompany has also entered commercial arrangements with retail chains such as Metro Cash and Carry India for the sale of Pigeon branded products from several of their retail outlets in India. Further, the company have also entered into agreements with e-commerce platforms such as Flipkart for the sale of its products on their portals.

Outside of India, it exports its products which are manufactured by it to retail chains in the United States of America and Mexico.

As of September 30, 2020, the company have a dedicated service team of 118 personnel to address service calls for all its brands.

Objects of the Issue: The IPO consists of two parts, i.e., Offer for Sale (OFS) by existing shareholders (both promoters as well as PE Investors) and fresh equity of shares. While the company will not receive any proceeds from the Offer for Sale, out of the net proceeds (fresh issue of Rs 95 crore less issue expenses) from the fresh issue, the company propose to use Rs 76 crore towards repayment and pre-payment, in full or part, of certain borrowings availed by the company and balance towards general corporate purposes.

The OFS comprises up to sale of 750000 equity shares by promoters [Rajendra Gandhi 690700 equity shares and Sunita Gandhi 59300 shares] and 7500000 equity shares by Sequoia Capital[SCI-GIH 1492080 shares; SCI Growth II 6007920 shares]. On post issue expanded equity capital the promoter share-holding (on upper price band) stood reduced to 54.36% and that of Sequoia capital to 12.45%[SCI-GIH to 2.48% and that of SCI to 9.97%].

Strengths

Has a diverse range of products across consumer preferences in kitchen solutions backed by strong brands of Pigeon, Gilma and BLACK + DECKER. The company through these three brands addresses all 3 segments of the market, i.e., value, semi-premium and premium segments.

The company is the market leader in overall cooking hobs especially free-standing hobs and cooktops (cooking stoves). It is one of the top 3 players in cookers, non-stick cookware and electric kettles, top five players in coffee maker. It enjoys a prominent position in the non-Stick cookware market in the southern region.

The company being one of the leading cooktop manufacturer and other kitchen products in the country see strong untapped opportunity emerge with the advent of several Government initiatives such as Pradhan MantriUjwalaYojana that is bringing more rural household under LPG connection/supply. The GST has paved the level playing field for the industry reducing the competition from the unorganised sector or small regional players. Moreover, the large cooking appliances (Cooker Hook/Kitchen Chimney; built-in/freestanding hobs; cooktops) is expected to register a CAGR growth of 8.7% and 12.5% in volume and value terms, respectively, through 2021-2025 to about 21.7 million units and Rs 20.1 billion.

Strong and increasing presence in modern distribution channels such as e-commerce and modern trade. Sales from e-commerce was about 20% in FY 2019 and that increased to about 26% in FY20 and further to 38.7% in H1FY2021. Similarly, the share of modern trade stood at 10% in FY19 and that has increased to 12.4% in FY 2020.

The company has strong in-house manufacturing capacity with about 79.75% of its Pigeon and Gilma branded products volume produced at both of its factories. The Bengaluru plant is an integrated facility comprising 12 manufacturing units, tailored to manufacture pressure cookers, non-stick cookware, hard anodized cookware, mixer grinders, induction cooktops, LPG stove, glass cooktops as well as LED products. Its manufacturing facilities are backward integrated with the ability to manufacture components such as Bakelitehandles, sheet metal components, moulded parts, die cast parts, moulds, dies and fixtures in house. Strong well backwardly integrated manufacturing unit helps the company to maintain quality and costs.

The company, to meet the changing needs in Kitchen solution fuelled by increase in per capita disposable incomes, continues to focus on entering new product categories or value added products in existing categories to meet the changing aspirations and ensure its presence in each rung of the value chain.

On account of Corona pandemic, there is preferential shift among customers towards in-house cooking (rather than eating out) leading to increase in demand for Kitchen solutions products/appliances.

Weakness

The company has ventured into noncore products such as LED products (under pigeon brand), IR Thermometers (Gilma brand), floor mops, trading of Pulse Oximeter (under Gilma brand), chairs, heating products, in which the company has no prior experience. Scaling and consolidation of this business requires additional resources and management bandwidth and there can be no assurance that these products will be profitable.

Preference shift towards normal/traditional cookware over non-stick cookware by health- conscious customers.

Under the terms of the BLACK + DECKER Brand License Agreement, all product intended to sell under Black + Decker Marks to be approved by B&D at the development stage, meet certain quality standards and achieve minimum sales per year as stated in the agreement. Failing which, B&D can unilaterally terminate the BLACK + DECKER Brand License Agreement. Further the BLACK + DECKER Brand License Agreement also imposes a non-compete obligation preventing the company from sales of any such products that are competitive to the Black + Decker brand by the company for the duration of the BLACK + DECKER Brand License Agreement and for a period of one year thereafter.

About 50.84% of the sales of the company in FY2020 and 47.8% in H1FY 2021 came from the Southern region of the country. Though it has declined from about 61.5% in FY2018, it is still significant and is both opportunity (to expand) as well as risk (interms of change in market preference/competition in a geography).

Flagship brand of the company Pigeon is registered for trademark by the company under various classes in 2003-2005 but that is now subject matter of litigation. PAPL, an associate company, got oral authorisation from the company to manufacture mixer grinders for the company under 'Pigeon' brand in 2003. The company though terminated the oral authorisation in 2015 and got temporary injunction against PAPL using 'Pigeon' brand for manufacture and sale of products. Since the final judgement is yet to come, any adverse result will hit the company as it accounts for about 77% of sales of the company in H1of FY2021.

Associate and group companies are operating in Kitchen solutions business either manufacturing or marketing end-product or manufacturing/importing/exporting components. SAEL, a group company is engaged primarily in manufacturing, importing/exporting of components for domestic and other appliances leading to conflict of interest. Similarly, PAPL, an associate company where it has 37.46% stake and promoter of the company is a director leading to conflict of interest. Promoters of the company have also been named as respondent to various criminal and civil proceedings.

There has been an instance of delay in filing of annual report by the Group Company. There have been instances of erroneous form filings in relation to allotment of Equity Shares of the company and transfers of Equity Shares of the Company, in relation to which the share transfer forms are not available in company's records.

Rajendra Gandhi, Promoter and Managing Director may be required to vacate his directorship from the Board of the company as per Section 164 (2) of the Companies Act 2013. Under section 164(2) of the Companies Act, 2013, any person who is or has been a director of a company which has not filed its financial statements or annual returns for any continuous period of three Fiscals, is ineligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date of failure of the company to make the filings. PAPL, an associated company where Rajendra Gandhi is a director has not filed annual returns for fiscal 2015. While the matter is currently pending before the NCLT and the RoC, in the event that an adverse or a final order is passed by the NCLT and the interim stay is vacated/dismissed, he may be disqualified to be reappointed on the board of PAPL or any other company including this one.

The company had a negative book value in the last three fiscals (Book value for FY20 is -Rs 23.74). The debt of the company as end of March 2020 stands at Rs 338.19 crore.

The company in accordance with its strategy of focusing on its brand business is progressively reducing its business with governmental and quasi-governmental bodies and OCBs. The OCB revenue has come down to Rs 20 crore in FY20 from about Rs 69.36 crore in FY 2019. This will impact the growth in the near-medium term.

Valuation

For the fiscal ended March 31, 2020, sales were up by 5% to Rs 669.86 crore. Higher sales together with 30 bps expansion in the operating profit margins (OPM) to 5%, has facilitated 13% jump in operating profit to Rs 33.79 crore. After accounting for higher other income, higher interest, and higher depreciation, the PBT was up by 189% to Rs 3.53 crore. With taxation stand lower by 25% to Rs 0.36 crore, the PAT was up by 331% to Rs 3.17 crore.

For the six months period ended September 2020, the sales were up by 4% to Rs 328.84 crore despite the impact of COVID pandemic. In H1FY2021 the Bengaluru and HP plants were shut down for 42 days and 34 days, respectively, due to COVID lockdown. Despite this the jump in revenue was largely facilitated by 179% jump in export revenue to Rs 58.87 crore, 49% growth in e-commerce sales to 127.29 crore and 48% increase in revenue of LED product to Rs 21.65 crore. But with OPM leap to 13.7% (from 5.9% in corresponding previous period) the operating profit jumped up by whopping 140% to Rs 45.06 crore. Jump in OPM was largely due to lower employee cost and other expenses. Lower employee cost was lower as the company rationalised white collar head count and temporary reduction in employee benefit expenses on account of lockdown. Lower other expenses were largely due to decision of the company to reduce job work charges, travelling and conveyance amounts, expenses associated with business promotion and advertisement and miscellaneous expenses due to COVID pandemic. Some of the cost savings due to pandemic will come back and thus sustainability of H1FY2021 margins to be seen. The PBT was up by 505% to Rs 28.78 crore after accounting for lower other income and higher depreciation. Eventually, PAT was up by 556% to Rs 28.78 crore.

For FY2020, the EPS on post issue equity was Rs 1. The TTM EPS for period ended September 30, 2020 was Rs 4.7. The upper price band of Rs 385 discounts the FY 2020 and TTM EPS by 385 times and 81.9 times, respectively. In comparison TTK Prestige and Hawkins Cookers quote at a TTM PE of 57.6 times and 46.7 times, respectively. However, the Butterfly Gandhimathi Appliances quotes at a PE of 448.9 times.
 

StoveKraft: Issue Highlights
Fresh Issue (in Rs. Crore)	95
Offer for sale (in Rs. Crore)
in Upper price band	317.6
in Lower Price Band	316.8
Price band (Rs.)
Upper	385
Lower	384
Post-issue equity (Rs crore)
in Upper price band	32.55
in Lower Price Band	32.55
Post-issue promoter (including promoter group) stake (%)
in Upper price band	54.4
in Lower Price Band	54.4
Minimum Bid (in nos.)	38
Issue Open Date	25-01-2021
Issue Close Date	28-01-2021
Listing	BSE, NSE
Rating	38

 

Stove Kraft : Financials
	1803 (12)	1903 (12)	2003 (12)	1909 (6)	2009 (6)
Sales	523.62	640.94	669.86	315.51	328.84
OPM (%)	1.9	4.7	5.0	5.9	13.7
OP	9.97	29.82	33.79	18.76	45.06
Other income	5.63	1.66	3.05	1.93	0.67
PBIDT	15.61	31.48	36.85	20.68	45.74
Interest	16.94	17.92	20.90	10.14	10.10
PBDT	-1.33	13.56	15.94	10.54	35.64
Depreciation	11.23	12.34	12.41	5.79	6.87
PBT	-12.55	1.22	3.53	4.75	28.78
Tax	-0.54	0.49	0.36	0.36	0.00
PAT	-12.02	0.74	3.17	4.39	28.78
EPS (Rs)**	-3.7	0.2	1.0	2.7	17.7
** on post issue equity on Upper price band of Rs 32.55 crore. Face Value: Rs 10 EPS is calculated after excluding EO and relevant tax # EPS can not be annualised due to seasonality in operations Figures in Rs crore Source: Capitaline Corporate database

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